A national pension scheme launched in 2015 and projected economic growth seen to be key drivers for Indonesia

The Global Pension Index reveals that The Netherlands is the most prepared for tomorrow’s ageing world, as Denmark comes in second

For the sixth year running, Indonesia has improved its overall score in the Melbourne Mercer Global Pension Index (MMGPI), an annual global report that brings together government, industry and academia to provide valuable insights on pension systems around the world. Since it was first included in the MMGPI in 2013, Indonesia has consistently improved and this year, attained an overall Index score of 53.1 compared to 49.1 in the previous year, successfully jumping from D to C category.

Indonesia’s current Index grade category is the same as that of Saudi Arabia, USA, Malaysia, Brazil, Hong Kong SAR, Spain, Poland, Austria, Italy and South Africa, however the individual scores for each country vary.

In particular, the 2018 MMGPI points out that Indonesia was able to see an improved score as a result of the successful implementation of the government-mandated BPJS pension scheme in 2015, into which employers and employees contribute a fixed percentage of the monthly salary. This recent pension reforms has significantly increased the net replacement rate in the adequacy sub-index. The improvement in Indonesia’s score can also be attributed to the economic growth during the last three years and the positive outlook for the next three years.

Bill Johnston, President Director and CEO, Mercer Indonesia, said, “Indonesia’s overall Index grade remarkably jumped to C category this year, indicating a system that has some good features, but also has major risks that need to be addressed. Therefore, there is still considerable work that needs to be done to improve Indonesia’s retirement income system.”

“These could include the introduction of a minimum level of support for the poorest aged individuals in the country; increasing the level of pension provision within the workforce and improving regulatory requirements for private pension systems as well as improving level of communication to members from pension arrangements. As life expectancy in Indonesia continues to increase, and the productive age of Indonesians continues to lengthen, there is also a need to consider increasing the retirement age. Without these improvements, the efficacy and long-term sustainability of the pension system can be questioned,” Mr. Johnston added.

Melbourne Mercer Global Pension Index 2018

Ageing populations continue to pose a challenge to governments worldwide, with policymakers struggling to balance the twin goals of delivering financial security for their retirees that is both adequate for the individual and sustainable for the economy.

Now in its tenth year, the Melbourne Mercer Global Pension Index reveals who is the most and who is the least prepared to meet this challenge.

Measuring 34 pension systems, the Index shows that the Netherlands and Denmark (with scores of 80.3 and 80.2 respectively) both offer A-Grade world class retirement income systems with good benefits - clearly demonstrating their preparedness for tomorrow’s ageing world.

However, common across all results was the growing tension between adequacy and sustainability. This was particularly evident when examining Europe’s results. Denmark, Netherlands and Sweden score A or B grades for both adequacy and sustainability, whereas Austria, Italy and Spain score a B grade for adequacy but an E grade for sustainability thereby pointing to important areas needing reform.

Author of the study and Senior Partner at Mercer Australia, Dr David Knox says that the natural starting place to having a world class pension system is ensuring the right balance between adequacy and sustainability.

“It’s a challenge that policymakers are grappling with,” says Dr Knox. “For example, a system providing very generous benefits in the short-term is unlikely to be sustainable, whereas a system that is sustainable over many years could be providing very modest benefits. The question is – what’s an appropriate trade-off?”

As highlighted in Chart 1, all systems should consider adjusting their strategy so they are moving towards the top right quadrant. Through the study, policymakers can understand the characteristics of leading systems and find ways to improve their own.

Dr Knox adds that it’s not enough for a system to be sustainable or adequate; an emerging dimension to the debate about what constitutes a world class system is “coverage” and the proportion of the adult population participating in the system.

“In some countries, broad coverage has been successfully accomplished through compulsory workplace pension systems or, in some cases, auto-enrolment arrangements,” he says.

“However, with changes in the way people are working around the world, we need to ensure these schemes include everyone so that the whole workforce is saving for the future. This includes contractors, self-employed, and anyone on any income support, be that parental leave, disability income or unemployed benefits.”

David Anderson, President, International at Mercer added that it was a positive step to see governments tackle pension reform as life expectancies continue to rise.

“Developed economies have been aware of the demographic challenges facing their pension systems for some time. Where economies are less developed, it’s pleasing to see many governments recognising the same trends emerging in their own populations and taking steps now to address this. Such actions make future pension systems more sustainable over the longer term,” he said.

“Ageing populations, high sovereign debt levels in some countries and the global competition to lower taxes constrain the ability of some jurisdictions to improve retirement income security. With a decade of unique data, the MMGPI and associated research can provide valuable global comparative insights to planners and policymakers on the way forward”, said Professor Deep Kapur, Director of Australian Centre for Financial Studies.

What does the future look like?

Some pension systems face a steeper path to long term sustainability than others, and all start from a different origin with their own unique factors at play. Nevertheless, every country can take action and move towards a better system. In the long-term, there is no perfect pension system, but the principles of “best practice” are clear and nations should consider creating policy and economic conditions that make the required changes possible.

With the desired outcome of creating better lives, this year’s Index provides a deeper and richer interpretation of the global pension systems. Having now expanded to include Hong Kong SAR, Peru, Saudi Arabia and Spain; the Index measures 34 systems against more than 40 indicators to gauge their adequacy, sustainability and integrity. This approach highlights an important purpose of the Index – to enable comparisons of different systems around the world with a range of design features operating within different contexts and cultures.

Melbourne Mercer Global Pension Index by the Numbers

This year’s Index reveals that many North-Western European countries lead the world in developing world class pension systems. The Netherlands, with an overall score of 80.3, beat Denmark to first place, a spot held by Denmark for six years, by 0.1. Finland bumped Australia (72.6) out of third place with an overall score of 74.5 and Sweden (72.5) coming in fifth place.

“The Index is an important reference for policymakers around the world to learn from the most adequate and sustainable systems,” Dr Knox says. “We know there is no perfect system that can be applied universally, but there are many common features that can be shared for better outcomes.”
Melbourne Mercer Global Pension Index – Overall index value results

The Index uses three sub-indices – adequacy, sustainability and integrity – to measure each retirement income system against more than 40 indicators. The following table shows the overall index value for each country, together with the index value for each of the three sub-indices: adequacy, sustainability, and integrity . Each index value represents a score between zero and 100.

The Melbourne Mercer Global Pension Index is published by the Australian Centre for Financial Studies (ACFS), in collaboration with Mercer and the State Government of Victoria who provides most of the funding. Financial support has also been provided by The Finnish Centre for Pensions.

About MercerMercer delivers advice and technology-driven solutions that help organisations meet the health, wealth and career needs of a changing workforce. Across the Pacific, organisations look to Mercer for global insights, thought leadership and product innovation to help transform and grow their businesses.

Mercer’s more than 23,000 employees are based in 44 countries and the firm operates in over 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), the leading global professional services firm in the areas of risk, strategy and people. With more than 65,000 colleagues and annual revenue over $14 billion, through its market-leading companies including Marsh, Guy Carpenter and Oliver Wyman, Marsh & McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit www.mercer.com.au.

About the Australian Centre for Financial Studies

The Australian Centre for Financial Studies (ACFS) is a research centre within the Monash Business School. The Centre was established in 2005 with seed funding from the Victorian Government and became part of Monash University in 2016. The asset management and pension industries are an area of particular focus for the Centre. For more information, visit www.australiancentre.com.au.

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